China-Venezuela relationship moves beyond trade

Venezuela has become China’s fifth largest trade partner in Latin America. Annual trade between the two countries has increased dramatically, from just over US$500 million (RMB3.4 billion) in 2003, to over US$7 billion (RMB47 billion) in 2009.

China’s need for natural resources and Venezuela’s desperate need for cash have fuelled, in large part, this increase in trade. And the relationship is developing beyond that of trading partners. China and Venezuela recently created a US$12 billion (RMB81 billion) bilateral investment fund for future projects between the two nations. China has also agreed to provide the technology and other resources needed to help Venezuela build a thermo-electric power plant. Venezuela, in turn, has created special incentives for Chinese investors seeking to exploit its rich mineral deposits.

Milestone transactions

The opportunity to invest in Venezuelan mines comes at a perfect time. During the last five years, China and Venezuela have concluded a number of milestone transactions in energy, project finance, infrastructure construction and mining. These transactions have paved the way for Chinese businesses to acquire resources and develop projects in Venezuela, placing China in a very different position from those nations that simply purchase raw materials.

For example, in July 2009, China Railway Group signed a contract with the Venezuelan government to build a 460-kilometre high-speed railway between Tinaco and Anaco. This US$7.5 billion project is the largest non-oil-related investment project in the history of Venezuela. Once completed (in 2012 according to the plan), the railway will connect Venezuela’s oil-rich region with its agricultural region, and have the capacity to transport 5.8 million people and 100 million tonnes of cargo per year.

In April this year, the China Development Bank entered into a long-term financing cooperative framework agreement with Petroleos de Venezuela (PDVSA) and the Venezuelan government, to provide a 10-year loan in the amount of US$20 billion to Venezuela (see also China Development Bank issues dual loan facility to Venezuela on page 9). At the same time, PetroChina signed a memorandum of understanding with PDVSA to establish a joint venture to drill oil from the 325-square-kilometre Junin 4 block oilfield in the Orinoco oil belt of Venezuela. Junin 4 is estimated to have a reserve of 8.7 billion barrels of oil. Once put into operation, it is estimated that the oilfield will produce 20 million tonnes of oil each year. At present, Venezuela exports 460,000 barrels of oil to China each day. The government of Venezuela has announced that it is planning to increase this amount to one million barrels per day.

The same trend is also evident in the mining sector. In June, China Railway Resources Group (CRRG) announced that it would acquire a two-thirds equity interest in a gold mine in Las Cristinas in southern Venezuela. Crystallex, a Canadian company, currently owns the mining rights for the Las Cristinas gold mine. However, to date Crystallex has not obtained all the permits and licences necessary to start mining. As a result, the mine is idle. Analysts familiar with the industry report that CRRG’s entry into the market may help kick-start operations, as CRRG’s good relationship with the Venezuelan government may help resolve the stalled licensing issues. Moreover, CRRG’s financial resources and technological expertise should go a long way to guaranteeing the project’s success.

Meanwhile, in May, Venezuelan President Hugo Chavez announced that China would invest in the mining of coltan, a key mineral used in electronics manufacturing and in the space industry. The two countries are currently verifying Venezuela’s coltan reserves.

These projects represent a great opportunity for Chinese companies interested in strategic investment in natural resources and willing to explore opportunities in Venezuela. President Chavez, for his part, expects more than US$120 billion worth of investments to flow into the Orinoco oil belt within the next seven years. All signs point to China accounting for a majority of that investment.

Trepidation remains

Despite all these opportunities, investors still express some trepidation over the potential for expropriation in Venezuela and other parts of Latin America.

There has been an alarming trend among resource-rich countries like Bolivia, Chile, Brazil and Venezuela to threaten or even pursue expropriation of mining enterprises as a means to ensure state control over critical natural resources. For example, in May 2009 PDVSA acquired 60 private oil extraction companies pursuant to the Law on State Control over the Assets and Services Relating to the Basic Activities in the Oil Industry promulgated on 7 May 2009. Most Western companies are therefore hesitant to invest in Venezuela.

China, however, does not share that trepidation. Because Venezuela and China’s strategic need for each other is obvious and is clearly beneficial to both, Chinese investors have good reason to expect that they will continue to enjoy positive results from investing in Venezuela, with lessened risk of potential expropriation.

For companies not willing to rely merely on the political goodwill of the Venezuelan government to safeguard their investment, there are alternatives. Both Venezuela and China have ratified the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, which permits aggrieved foreign investors to arbitrate any dispute against a host nation, such as Venezuela, through arbitration.

In addition, because both Venezuela and China are signatories to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), a commercial arbitration award rendered in either country is generally recognized and enforceable in the other country. As a result, a Chinese company contemplating to invest in Venezuela may rely not only on the political arrangements between the Chinese and Venezuelan governments, but may also resolve any potential dispute against the Venezuelan party through binding arbitration.

Vincent Li and Gerardo Rodriguez-Albizu are associate attorneys at Diaz Reus & Targ